Midcap and Small Cap equity mutual funds had a dream run from 2014 to 2017. During this period the Nifty Midcap 100 and Nifty Small Cap 100 indices grew at a CAGR of 28% each. Midcap and small cap mutual funds were able to give superlative returns during this period and were able to attract a lot of investor interest. By the end of 2017, the valuations of many midcap and small cap stocks reached sky high levels and a correction in the midcap and small cap market segments seemed imminent.
2018 saw a big correction in the midcap and small cap segments. Nifty Midcap 100 index has fallen by 10% on a year to date (YTD) basis while Nifty Small Cap 100 index saw a bigger decline falling by more than 20% (YTD). On the contrary, the Nifty 50 index, the index of the 50 largest stocks by market capitalization has risen by more than 7% this year. If we compare performances of mid, small cap and large cap equity mutual funds in the last 12 months or so, large cap equity mutual funds have clearly outperformed the other two categories, as shown in the chart below. Therefore, the investor interest is returning to the large cap mutual fund category.
We in Advisorkhoj always advocate a judicious portfolio allocation across different market capitalization based on your risk appetite and influenced by current market trends. If you do not have very high risk appetite, your core equity portfolio should comprise of funds which have substantial allocations to large cap stocks. Sundaram Select Focus fund is a focused equity fund with a bias towards the large cap segment. It is one of the best performing focused equity mutual funds in the last 1 year or so.
Focused equity mutual funds
As per SEBI guidelines, focused equity funds is a category of mutual fund schemes where each scheme is focused on a few stocks – the maximum number of stocks a focused equity fund can invest in is 30. These schemes are less diversified than schemes which invest in a larger number of stocks and thus have higher concentration risks. However, fund managers of focused equity schemes have the ability to generate superior alphas through superior stock selection and sticking to high conviction bets.
Sundaram Select Focus Fund
The scheme was launched in July 2002 and has Rs 886 Crores of Assets under Management. The expense ratio of the fund is 2.38%. It is a large cap biased focused equity fund and the scheme benchmark is Nifty 50 TRI. The chart below shows the annual returns of Sundaram Select Focus fund over the last 5 years. You can see that the scheme was able to beat the benchmark in most years.
The chart below shows the NAV movement of the scheme over the last 5 years.
The chart below shows the 3 years rolling returns of Sundaram Select Focus Fund versus its benchmark Nifty 50 TRI over the last 5 years. We are looking at 3 year rolling returns because investors should have a minimum 3 year investment horizon for equity funds.
Source: Advisorkhoj Rolling Returns tool
You can see that, the fund was able to beat its benchmark in most periods over the last 5 years. The average 3 year rolling return of the scheme over the last 5 years was 10.6%, while the median 3 year rolling return of the scheme over the last 5 years was 10.3%. For a large cap oriented scheme, these are excellent statistics.
The maximum 3 year rolling return of the scheme over the last 5 years was 15.7%, while the minimum 3 year rolling return of the scheme over the last 5 years was 6.2%. The chart below shows the 3 year rolling returns consistency of the fund over the last 5 years. You can see that the scheme was able to beat typical fixed income returns 92% of the times, over a 3 year investment tenor over the last 5 years.
Rahul Baijal is the fund manager of this scheme. The fund manager invests in a maximum of 30 stocks across sectors with the objective to deliver consistent and steady returns over time with limited volatility. At any time, the fund would have more than 80% of the corpus invested in well managed and established large cap companies (Top 100 companies by market capitalization). The fund manager follows a bottom up approach in stock picking based on in-house research and the fund manager’s conviction. The scheme portfolio is generally focused around 3-4 themes. The investing style of the fund manager has a GARP (Growth at Reasonable Price) bias.
Key themes of the fund manager are as follows:-
Discretionary Consumption:Structural attractiveness due to higher incomes, improving consumption patterns and rising penetration. In relation to this theme, the fund manager is overweight on sectors like Automobiles, Consumer durables, Retail Banking etc.
Domestic Cyclical Recovery:The Indian economy is expected to witness revival in economic growth which will augur well for cyclical stocks. In relation to this theme, the fund manager is overweight on corporate lenders and select industrial stocks.
Government Reforms:From the perspective of Government reforms the fund manager is overweight on Oil Marketing Companies and companies which are beneficiaries of Government reforms and spending
Weak Outlook on exporters (except IT):In this regard the fund manager is underweight on metals and pharmaceuticals.
The chart below shows the major sector allocations and top holdings of Sundaram Select Fund portfolio.
Lump Sum and SIP Returns
The chart below shows the growth of Rs 1 lakh lump sum investment in the Sundaram Select Focus Fund Growth option over the last 5 years. Your investment in the scheme would have more than doubled in value over the last 5 years. The fund has given over 16% annualized returns in the last 5 years.
The chart below shows the returns of Rs 5,000 monthly SIP in the scheme’s growth option over the last 5 years. With a cumulative investment of Rs 3 Lakhs, you could have accumulated a corpus of Rs 4.35 Lakhs in the last 5 years. The SIP returns of the Fund has been over 13%
Dividend Track Record
Sundaram Select Focus Fund has a strong dividend track record for the last 2 years or so. Annual dividend yield (10%+) is quite good.
Sundaram Select Focus Fund has completed 14 years. As a focused large cap fund, its performance is quite good. A focused fund can underperform from time to time but has the potential to give good returns in the long term. If you are looking for portfolio stability and long term capital appreciation, then you can evaluate Sundaram Select Focus Fund.
This fund can be suitable for long term financial goals like retirement planning, children’s education, children’s marriage and wealth creation. You can invest in the fund both in lump sum and SIP modes; if you are worried about high valuations currently, then you can consider doing a 6 month Systematic Transfer Plan (STP). Investors should consult with their financial advisors if Sundaram Select Focus Fund is suitable for their investment needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.